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Where Returns Came from in 2023


Sloane Ortel

Founder and Chief Investment Officer of Ethical Capital.

Where are the returns coming from?

If I teach you nothing else, remember that question. It’s one of the most important things you can ask as an investor. And if you keep asking it until you’re blue in the face, you’re all but guaranteed to learn something.

So let’s look past our flagship strategy’s handsome headline performance figure of 33.51% together.

The chart below shows all of the companies that we owned at one point in 2023 and their contributions to overall performance. We’ve used their ticker symbols in place of their names to save space. Companies that we don’t own anymore as of 1/1/2024 are denoted with an asterix (*).

One more note before we get into this: I’m mostly talking about financial returns in this piece. A supplemental piece where we talk about the real-world impact each company generates will follow shortly.

Image showing the return contribution by stock of the Global Opportunities strategy in 2023

I’ll briefly discuss the top five contributors and detractors from performance before comparing our performance with our index.

Top 5 Detractors from 2023 Performance

  1. Enphase (ENPH) was our single largest detractor from performance, which you might expect from a stock that was down roughly 50% in 2023. The solar power industry as a whole was a poor performer in 2023 thanks to changes in California’s net metering laws that substantially reduced the industry’s sales momentum. But we believe great businesses are built in downturns like these, and as long-term investors we have complete confidence in the management team led by the indefatigable Badri Kothandraraman.
  2. Crocs (CROX) was the second-largest detractor from performance after momentum slowed at Heydude, a footwear brand it acquired in early 2022. This has produced a degree of financial indigestion as markets struggled to make sense of what to expect from the newly combined entity. We reduced our position during the year and cannot profess blind faith in the management team. With that said, we believe shares offer compelling value at the moment, with a ratio of free cash flow to market capitalization of roughly 15%.
  3. Alexandria Real Estate (ARE) was the third-largest detractor from performance as the slowing commercial real estate market affected valuations of all companies included in commercial real estate indices. But Alexandria’s hyper-specialized business of providing lab space to innovative biotechnology companies can hardly be thought of as similar to mainstream commercial office buildings. We are willing to wait until the market recognizes this firm’s value, and expect to be paid handsomely in the form of dividends, reinvested cash flow, and price appreciation.
  4. American Tower Corporation (AMT) We exited this position on concerns that liabilities associated with the lead cables used to connect their cellular towers to their networks were not fully contained.
  5. HDFC Bank (HDB) This bellwether bank has significantly lagged behind the rest of the Indian stock market as it digests a complex merger process.

Top 5 Contributors to 2023 Performance

  1. Farmer Mac (AGM) It’s appropriate that our single largest position since inception would be the single greatest contributor to our portfolio’s performance. Much of the reasoning we shared back in January 2022 remains unchanged, and we have grown the position since that post to almost 15% of our ethical growth strategy. As a portfolio manager, one of my largest fears is that the market will come to recognize the value of this unique company before I can buy even more of it.
  2. Duolingo (DUOL) The market afforded us the opportunity to buy into this remarkably impactful firm at a discount to its IPO price, and we did so in size. In the ensuing months, an old-school bubble in everything and anything vaguely linked to AI took hold, and the price appreciated significantly. We’re no longer holding quite as many shares of this firm. But we challenge anyone to watch CEO Luis Von Ahn’s 2011 TED talk on the thesis for Duolingo and walk away anything but inspired and excited. Today, shares are only about 70% above their summer 2021 IPO price, and the company continues to grow revenues at a remarkably stable 40% a year.
  3. TopBuild (BLD) I can’t help but smile every time I think of this position, which we’ve held since the strategy’s inception. In 2022, market prognosticators were calling for a recession, which cut the price of this insulation distributor down to half the current level because sales of insulation products are broadly seen as tied to the housing cycle. But the compelling operational footprint that this company has carefully assembled over decades combined with the real-world cost savings that good insulation offers building owners to create a wonderful financial equation as they thoughtfully consolidate their industry over the coming decades.
  4. E.L.F. Beauty (ELF) This company needs no introduction for any makeup users reading this piece. They produce cruelty-free competitors to costly beauty staples at a remarkable clip, and are experiencing accelerating revenue growth as they penetrate deeper into traditional sales channels while retaining an ironclad hold on gen-z and cost-conscious consumers. The only reason it’s not a larger position in our portfolios is that our process requires us to be mindful of valuation, and the company is regularly in the most expensive decile across a range of metrics. With that said, we’re likely to be shareholders for many years to come.
  5. Quanta Services (PWR) This company has a commanding position in infrastructure services, which includes renewable energy, communications, pipeline maintenance, and almost everything related to the electrical grid. Their approach to safety has long captivated me, and the company has been a prime beneficiary of the federal government’s infrastructure spending. With a sales backlog that may be larger than their $30 billion market capitalization by now, this company is profoundly well prepared for whatever future may come.

Comparison with our Index

On the face of things, we substantially outperformed our index last year.

That’s relatively simple to establish: The Ethical Growth strategy’s 33.51% return was larger than the MSCI ACWI’s 22.27% return.

But it’s also not the most complete analysis, since many of the largest contributors to the index’s returns are excluded from all of our strategies for ethical reasons. These are companies like Amazon, Johnson & Johnson, Nestle, Exxon, and McDonald’s that generate profits for their shareholders at great cost to the rest of us.

To facilitate a better comparison, I cross-referenced my attribution of the MSCI ACWI’s returns with our proprietary ethical exclusions library to produce the chart below. It shows that applying the same ethical exclusions to our index would have reduced the index’s return to less than 15%.

This mostly serves as a reminder that there’s more to portfolio management than just removing companies with sketchy practices from your portfolio.

Many investment firms will represent that they are able to take your ethical criteria and apply them to portfolio management, but it’s not enough to simply eliminate the companies that act badly. For best results, you need a team that is willing to truly inhabit the restricted universe that your ethics imply.

I’m grateful that many of you have chosen us to perform that work for you, and look forward to doing it for many years to come.

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